Full-service hotels are once again in demand by owners and developers

For the past 20 years or so, select-service was the segment of choice for many hotel developers. They liked the product's low cost of construction and high profit margins. And while select service is still popular among owners and developers, some are turning back to full-service hotels as their primary growth vehicles.

The Buccini/Pollin Group, for example, has since late 2013 been executing a strategy to acquire full-service hotels in secondary markets. In July, the completed closed on the acquisition of the 353-room Sheraton Raleigh Hotel in North Carolina. That purchase followed a $25-million acquisition in 2014 of the 317-room Hilton in Knoxville, Tenn.

"The midsized, full-service hotel space is a great place to be today," said David Pollin, principal and co-founder of The Buccini/Pollin Group. "The Raleigh hotel is in the central business district, as is the Hilton in Knoxville. That's our focus: going into the CBDs of these great secondary markets."

Pollin said an upturn in group business is one reason these properties make financial sense.

"In our portfolio, we've seen group bookings grow at a strong pace, food-and-beverage revenues increase faster than room revenues and attrition going down with our group meeting blocks," he said. "Midsized, full-service hotels with 300-or-so rooms and 25,000 square feet of function space are perfect for the 50- to 500-person meetings. That's where the growth is."

Other investors and developers are jumping on the full-service bandwagon. In June, HHM completed the acquisition of the 405-room Sheraton Miami Airport as part of the company's strategy to invest $500 million in the next three years in full-service hotels in which it can add value to the properties.

Construction is scheduled to begin this fall on a 200-room Westin in downtown Chattanooga, Tenn. The property, which will open in late 2016, is an adaptive reuse of an existing office building. And in Jackson, Miss., Capital Hotel Associates is planning a $60-million, 205-room Westin Hotel that will open in 2017.

Strong performance

For the most part, full-service hotels are in the upscale and upper-upscale segments of the industry, two tiers that have enjoyed strong performance this year.

Year-to-date through June, occupancy in both segments is about 75 percent, up one percentage point from the same period in 2014. In the upscale segment, strong increases in average daily rate (up 5.2 percent through June) have offset a significant jump in new supply (up 3.8 percent).

Results are more muted for the upper-upscale segment, with year-to-date increases in demand (up 2.1 percent), ADR (up 4.8 percent) and supply (up 1.2 percent).

Industry forecasts for the coming year look good for both segments. The upper-upscale tier is forecast to see a 6.1-percent increase in revenue per available room during 2016. RevPAR for upscale hotels should rise 5.7 percent in 2016. Most of the RevPAR growth next year will be due to rising ADRs: 5.1 percent for upscale properties and 5.6 percent in the upper-upscale segment.

The pipeline

Both segments have robust development pipelines. The total pipeline for the upper-upscale segment comprises 156 hotels with 37,909 rooms, while the upscale pipeline has 1,012 properties with 133,706 rooms.

Openings this year in the upscale segment (220 hotels with 26,850 rooms) represent a 4.1-percent increase in the segment's supply. That is the highest supply increase expected this year for any segment in the industry. Just 30 upper-upscale hotels with 5,775 rooms (a 1-percent increase in supply) will open in 2015.

Spikes in supply growth will continue into 2016 and '17, especially in the upscale tier. During those two years, nearly 550 properties with about 70,000 rooms will open in the segment.